How is Keyman Insurance Taxed?

Get My Instant Quotes
Compare Top UK Insurer Quotes Logos
10-09-2020

Keyman Insurance protects your business from the loss of a key employee due to death or critical illness. It pays out a cash lump sum into the business so the company can cope with any turbulence such a loss causes. For example, it can help with:

The below is a general guide to how HMRC taxes Key Person Cover. However, if there’s any doubt you should always check with your accountant and / or your local tax office.

HMRC, Keyman Insurance and Tax

How HMRC taxes Key Man Insurance is complicated. It’s governed largely by a set of guidelines laid out more than 70 years ago known as the Anderson Rules.

One of these guidelines is the ‘wholly and exclusively test‘. This represents one of the major factors that decides whether or not you pay tax on Keyman Insurance premiums.

The test examines whether the payout from the policy will be ‘wholly and exclusively for the purposes of the company’s trade’, i.e. solely for the benefit of the business. If so, premiums are typically a tax-deductible business expense against the company’s corporation tax bill.

Taxation When Protecting a Shareholder…

However, where a policy benefits the company shareholder, the purpose of the policy fails the ‘wholly and exclusively’ test. Premiums are therefore unlikely to be eligible for corporation tax relief.

According to HMRC’s Business Income Manual at BIM45530:

“Where the key person is a director whose death would significantly affect the value of shares in the company, one of the purposes for taking out the policy may be a non-trade purpose of protecting the value of the director’s shares and therefore the value of their estate … [and are] not paid wholly and exclusively for the purposes of the company’s trade.”

There may be some ‘wiggle room’ for minority shareholders who own around 5% or less of the company. This limit isn’t statutory —it’s more of a guideline. It may therefore be open to negotiation with HMRC on a case-by-case basis.

Payouts on plans that cover company shareholders usually count as a trading receipt, which means HMRC also taxes the payout. So it’s worth remembering that policies that benefit shareholders could be taxed on the way in and on the way out.

Tax When Covering an Employee…

When a business takes out Keyman Insurance to cover an employee, premiums are typically a tax-deductible business expense eligible for corporation tax relief. This is because the payout is not for the benefit of the employee but for the business to make up for the loss of that key person.

However, the benefit usually counts as a trading receipt and will therefore be taxable. As such, you’ll need to gross up the payout to ensure that the net figure you receive post-tax still meets your needs.

Tax When Covering a Business Loan…

When you take out a Key Person policy specifically to protect a business loan, premiums again fail the ‘wholly and exclusively’ test. This is because the payout isn’t for the business — it’s for the benefit of the lender. You’ll therefore need to pay tax on premiums covering business loans.

However, given the payout is intended to rebalance the company’s capital account, it’s not usually classed as a trading receipt. The payout is therefore usually tax-free. This means that there’s no need to gross up the value of such policies, which naturally reduces the premium.

Sam Barr-Worsfold Business Protection Expert at Drewberry

As a general rule of thumb, where you get tax relief on premiums, the benefit will be taxable and vice versa. However, this isn’t always the case, such as where the policy covers a shareholder, so it’s always best to check the ins and outs with your accountant and HMRC.

Sam Barr-Worsfold
Business Protection Expert at Drewberry

Get Keyman Insurance Quotes and Expert Advice

While the above offers a rough guide to the tax position of Keyman Insurance, it’s a complicated area. That’s why it’s always best to get professional advice. At Drewberry we have experience in setting up Keyman Insurance policies for businesses across the country.

For help and expert advice in this area, please don’t hesitate to give us a call. You can reach us on 02074425880.

I had a great experience with Drewberry, they have a lot of knowledge and expertise with life insurance and income protection and were able to advise me and arrange suitable products. Highly recommend.

Lachlan Mellings
12/08/2020
Reviews.co.uk Logo
Compare Top 10 UK Business Insurers
Takes approx. 60 seconds
  • £

Or call us on 0208 432 7333

Compare Top UK Insurer Quotes Logos
Contact Us
Head Office & Pensions and Investments
Senator House
85 Queen Victoria Street
London
EC4V 4AB
Personal Insurance & Accounts Payable
Telecom House
125-135 Preston Road
Brighton
BN1 6AF
Drewberry London Office MapDrewberry Brighton Office Map
Our Core Principles
  • 1You Come FirstWe are a client focused business who always aim to put you first.
  • 2We are ExpertsTo provide you with the best advice, we need to know our stuff!
  • 3We are HumanWe are real people with feelings who are here to help you.
  • 4We are ProfessionalProviding a 5-star service requires a professional approach to everything we do.
  • 5We are here to EducateWe don't believe in sales, we are here to educate so you can make informed decisions.
Finalist - Moneyfacts AwardsFinalist - Cover Excellence AwardsHighly Commended - Protection Review Awards
Proud member of AMII (Association of Medical Insurers & Intermediaries)Proud member of Money Advice ServiceProud member of UnbiasedProud member of BIBA (British Insurance Brokers' Association)

If you are unhappy with our service, we have a complaints procedure, details of which are available upon request. If you are unhappy with how your complaint has been dealt with, you may be able to refer your complaint to the Financial Ombudsman Service (FOS). The FOS website is www.financial-ombudsman.org.uk.

Drewberry Ltd is registered in England and Wales. Companies House No. 06675912

Drewberry Ltd registered office: Telecom House, Preston Road, Brighton, England, BN1 6AF. Telephone 0208 432 7333

Drewberry Ltd (Financial Conduct Authority No. 505473) is an Appointed Representative of Quilter Wealth Limited and Quilter Mortgage Planning

Limited, which are authorised and regulated by the Financial Conduct Authority.

Cookie Use

Drewberry™ uses cookies to offer you the best experience online. By continuing to use our website you agree to the use of cookies. If you would like to know more about cookies and how to manage them please view our privacycookie policy.